Research

A recent sentiment survey conducted by the American Association of Individual Investors (AAII) showed a spread of over 44% between the percentage of Bulls and the percentage of Bears. With data going back to July 1987, this is higher than 97% of historical readings.

Source: AAII, Pension Partners. Date Range: July 1987 – January 2018.

The AAII survey asks investors how they feel about the direction of the stock market over the next six months. Why are investors so optimistic about the future?

They are projecting the recent past into the future, a phenomenon known as recency bias.

The S&P 500 Total Return Index has been positive for 14 consecutive months, the longest run in history.

In prior periods when investors were at similarly optimistic extremes as they are today (above the 95th percentile), what happened over the next year?

Average forward returns over the next 3 months, 6 months, 9 months, and 1 year were negative and significantly below the average forward returns from all sentiment readings.

Source: AAII, Pension Partners. Date Range: July 1987 – January 2018.

At the opposite end of the spectrum, extreme fear (below the 5th percentile), we see opposite results. After investors are pessimistic about the future, average forward returns have been positive on average and above the average forward returns from all sentiment readings.

Source: AAII, Pension Partners. Date Range: July 1987 – January 2018.

With all due respect to Gordon Gekko, then, when it comes to investing it appears to be fear – not greed – that is good. Fear creates opportunity and a favorable balance between risk and reward as it tends to coincide with lower prices and lower valuations. Alternatively, greed tends to lead to poor decision making and chasing investments at higher prices/valuations with lower prospective reward.

CHARLIE BILELLO, CMT

Charlie Bilello is the Director of Research at Pension Partners, LLC, manager of the ATAC Inflation Rotation Fund (ATACX). He is the co-author of four award-winning research papers on market anomalies and investing. Mr. Bilello is responsible for strategy development, investment research and communicating the firm’s investment themes and portfolio positioning to clients. Prior to joining Pension Partners, he was the Managing Member of Momentum Global Advisors and previously held positions as a Credit, Equity and Hedge Fund Analyst at billion dollar alternative investment firms.

Mr. Bilello holds a J.D. and M.B.A. in Finance and Accounting from Fordham University and a B.A. in Economics from Binghamton University. Charlie holds a J.D. and M.B.A. in Finance and Accounting from Fordham University and a B.A. in Economics from Binghamton University. He is a Chartered Market Technician (CMT) and also holds the Certified Public Accountant (CPA) certificate.

In 2017, Charlie was named the StockTwits Person of the Year. He is a frequent contributor to Yahoo Finance and has been interviewed on CNBC, Bloomberg, and Fox Business.

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